Shareholder activism in its infancy

Columnist

UNCERTAINTY in the market about recent manoeuvring around Qantas and its share register reflects the embryonic nature of the shareholder activism asset management class in this country. The emergence of Mark Carnegie and his $130 million Companion Fund on two share registers, Qantas and Washington H. Soul Pattinson, suggests, however, that we are now on a steeper learning curve.

There's always been big investors willing to buy into a company and agitate for change. Robert Holmes a Court was a classic example here in the '80s. Shareholder activists have, however, become very active overseas since the global crisis, as traditional takeovers fail to win financing. A significant investment banking business providing reactive and pre-emptive defence advice to targets has grown up on the other side, dominated as is often the case by Goldman Sachs.

US investor Carl Icahn is the activist movement's whale. He still mounts outright takeovers, but also deploys and recycles more than $US10 billion ($A9.5 billion) of gearable capital on shareholder activist strategies at a host of companies. Other prominent activist shareholders are Nelson Pelz, who has taken on groups including Heinz and

Cadbury-Schweppes, Third Point's Daniel Loeb, who bought into and now sits on the board of Yahoo, Relational Investors' Ralph Whitworth, and London-based Children's Investment Fund, a 6 per cent shareholder in Australia's QR National rail freight group.

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Campaigns by aggressive players such as Icahn for break-ups, spin-outs, board changes and buybacks place shareholder activists broadly in the mergers and acquisitions business, but there are key differences between them and the takeover merchants that were active ahead of the global crisis.

Shareholder activism very rarely involves a full bid, and in that respect questions about the funding resources Carnegie's group has behind it are wide of the mark: activism is a ''capital-light'', medium-term strategy that involves the acquisition of a seed holding, often using derivatives, and then an attempt to recruit other shareholders in what is, in essence, a political campaign for strategic change. Activist fund operators raise money from wealthy investors and institutions in much the same way other ''alternative investment'' vehicles including hedge funds and private equity funds do, and charge similar fees, with bonus fees applying to above-market returns.

Their backers understand that successful plays will be outnumbered by ones that fail to gain traction, and invest in the belief that the average return will beat the market. They can fund specific corporate plays or a portfolio of activist positions, and the roll call of those reporting to be backing Carnegie's tilt at Qantas reflects the mix, ranging from former chief executive Geoff Dixon and former Qantas chief financial officer Peter Gregg to more generally focused investors including Harvey Norman founder Gerry Harvey and advertising guru John Singleton.

In two of about half a dozen developing plays that have entered the public domain, Carnegie has used an equity swap with Credit Suisse to put his foot on about 1.5 per cent of Qantas, and has written an option with the Perpetual funds management group over a $30 million stake in Soul Pattinson and its stablemate, Brickworks. The option covers about 5 per cent of Perpetual's total holding in those two companies, which are linked by cross-holdings. It will be exercised if the shares rise to undisclosed targets, perhaps as a result of Carnegie easing or unlocking the cross-holding structure.

Carnegie is telling institutions that they are heavily exposed to large Australian companies that are 30 per cent behind the rest of the world in capital productivity, and that they can close the gap by supporting activist strategies.

The task for him and any activist manager is not to pay the cheapest price for control, but to successfully lobby for structural change, usually initially behind closed doors and then, if the target resists, in public.

Retail shareholders can be recruited in campaigns, either through direct appeals (activists such as Loeb routinely publicise correspondence with target companies) or in Australia using shareholder meetings that actually see the target company financially subsidising the activist campaign.

Index funds are a less important vote catchment than their wholesale fund manager clients, who retain voting rights, quantitative funds that invest mathematically are difficult to sway and proxy advisers are important gatekeepers to traditional institutional investors.

Talks with Qantas shareholders appear to have led the Carnegie group to believe for example that the owners of about 14 per cent of the company including Capital of the US might be prepared back a campaign for board changes and asset disposals including the sale of half of Qantas' lucrative Frequent Flyer program.

The unwritten rule of activist campaigns is that uncommitted shares will break two-thirds in favour of the incumbent board, however, and that means that Carnegie's activist group needs to be backed by at least 26 per cent of the register to hope to carry a majority vote. Taking its own stake into account it needs another 10 per cent, and funds that might get it over the line including industry funds that own more than 10 per cent of Qantas all rely on proxy advisers.

Talks with Qantas shareholders and their own advisers do not appear to have accelerated, leaving the situation unresolved, and it may well stay that way in the run up to the Christmas break. Carnegie's progress on the Qantas project in the New Year would depend on how much of register he gets onside, and also, perhaps on whether Qantas responds with initiatives of its own. A board shuffle is a standard defensive response to activism in the US market.